Power Crisis a National Threat, Greenspan Says

The nation’s top economic policymaker warned Thursday that California’s electricity crisis is threatening to undermine America’s decade-long expansion, while a group of respected economists dismissed much of what Sacramento is doing to resolve the problem as wrongheaded.

Federal Reserve Chairman Alan Greenspan said the state’s soaring utility bills and rolling blackouts are not isolated phenomena or aberrations, but signal “a significant problem that this country is going to have to address, and . . . rather quickly.”

Greenspan offered no quick fixes, but said California’s troubles cannot be ignored by other states or--as some Bush administration officials have suggested--by the federal government.

“It’s scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states,” Greenspan said in congressional testimony. “I think that the presumption that we can merely look at this as an issue which is going to get relatively easily resolved . . . is clearly mistaken.”

Greenspan’s comments came as a group of almost 20 economists--including two Nobel Prize winners and a former Republican-appointed president of the California Public Utilities Commission--warned that Gov. Gray Davis and the Legislature will be making fateful mistakes if they try to shield consumers from rate hikes and make the state a major power purchaser.

Both developments occurred as the state’s problems rippled across the West and the nation.

In Phoenix, Phelps Dodge Corp. warned 2,350 workers at its New Mexico and Arizona mines that California-induced energy price hikes could force the firm to lay them off and shut down operations.

“Until the California power crisis is resolved, its negative impact on industrial facilities in surrounding states will be huge,” said Chief Executive Officer J. Steven Whisler.

In Tennessee, Treasurer Steve Adams warned that his state could lose millions of dollars on its commercial paper investments in Pacific Gas & Electric, California’s largest utility.

PG&E; defaulted Tuesday on $30 million of commercial paper held by Tennessee’s $4-billion investment fund, Adams said. “This has never happened to us before,” he said in an interview. “We’ve never had a default on a piece of commercial paper.”

“Potentially, we could lose it all.”

Could Shake Consumer Confidence

Greenspan told members of the Senate Budget Committee that the California crisis could exacerbate the national economy’s problems by reducing business investment in the West and shaking consumer confidence. Independent economists said the state’s troubles come at a particularly bad time for the nation.

“California is a pretty good-sized downside risk for the country,” said Mickey D. Levy, chief economist with Bank of America Securities in New York. “It doesn’t have to turn out badly, but at a time when you’re already worried about the overall economy, this is just what you’d rather not face.”

Gov. Davis and the state’s legislators have fiercely argued that California’s ailments could spread like a virus throughout the country. For that reason, they have pushed for greater federal involvement, which the Bush administration so far has said will not be forthcoming.

As the crisis has accelerated in California, lawmakers have been churning out proposals, hoping to find one that will draw bipartisan support. The latest, and among the most far-reaching, was introduced Thursday by Assembly Speaker Bob Hertzberg (D-Sherman Oaks).

His measure would allow the state to gain what amounts to a stock ownership interest in private utilities and give them authority to pay off their multibillion-dollar debt with a portion of the amount consumers are charged. The bill, expected to face its first vote today, also would authorize the state to take possession of assets owned by Edison and PG&E;, including hydroelectric plants and transmission lines--a provision opposed by Republicans and many Democrats.

There were other developments as well in Sacramento:

* A day after 39 private power suppliers submitted bids to sell power to the state, Davis said he expects within 10 days to sign long-term contracts with private power companies to buy electricity.

* A Senate committee approved legislation authorizing the state to enter the electricity business and remain in the industry for years to come, a step unprecedented in California’s history. The full Senate could vote on it as early as Monday.

* State Sen. Martha Escutia (D-Whittier) introduced legislation that seeks to re-regulate rates paid by homeowners, renters, farmers, schools and businesses that consume modest amounts, while larger industrial and commercial users could either pay higher rates or negotiate deals with power generators on their own.

Escutia, backed by consumer advocates, asserted that individuals did not benefit from lower rates promised in 1996 by supporters of the legislation that deregulated electricity, while large energy users pushed for the measure.

“The core customers protected by this bill are those who did not ask for deregulation and, yet, have had to bear the greatest burden of skyrocketing rates and power outages that they cannot afford,” Escutia said at a news conference.

Rates Must Go Up, Economists Say

The various approaches being considered in California are simply wrongheaded and dangerous, according to a group organized by UC Berkeley economist David Teece that plans to issue a position paper today raising concerns about Sacramento’s efforts to craft a fix for the crisis.

“California is confronting an unprecedented electricity crisis, which threatens to wreck its economy and cause collateral damage throughout the West,” the position paper warns.

“An essential element of the solution is to raise retail prices,” the paper says. “Unfortunately, there is no other way out. Either retail prices go up, or the frequency of rolling blackouts will accelerate.”

The group warns against making the state a major electricity purchaser or having it sign long-term contracts for power--both steps that Davis and the Legislature are preparing to take.

“Now is precisely the wrong time for the state to commit to long-term contracts for a large portion of California’s electricity needs, since below-market prices now can only come at the expense of above-market consumer prices in years to come,” the paper says. It suggests contracts no longer than two years.

Among those endorsing the paper, according to Teece, are Nobel Prize winners Dan McFadden of Stanford and Robert Solow of MIT, former Republican congressman Tom Campbell, now at Stanford law school, and former PUC head Mitch Wilk, now an energy consultant.

Also endorsing the document are former Fed Governor Janet Yellen and former U.S. Energy Department officials William W. Hoan, now at Harvard, and Philip Verleger, now a Newport Beach consultant.

The paper’s authors argue that in addition to making consumers pay more, California’s tottering utilities, its power providers and the state and federal governments must strike a deal to restore PG&E; and Southern California Edison to enough health so the firms can return to the financial markets.

“Just doing that will increase the supply of electricity that people are willing to sell to them,” said Pablo Spiller, a Berkeley economist.

In the long run, both the Berkeley-organized group and Greenspan said that the solution to the crisis is building new power plants and increasing supply. Until then, the state faces higher prices or, in the Fed chairman’s words, “you ration through brownouts and blackouts.”

*

Morain reported from Sacramento. Times staff writers Richard Simon in Washington and Christine Hanley in Orange County contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Greenspan on the Power Crisis

What Federal Reserve Chairman Alan Greenspan said on energy and the California power crisis during an appearance before the Senate Budget Committee:

“In my judgment, the problems that we are now seeing in the energy area, specifically . . . natural gas around the country and very obviously California’s electric power production, are not aberrations but . . . a significant problem that this country is going to have to address, and address rather quickly.”

* * *

“Obviously, if the energy structure of this country is inadequate or in some way excessively costly, it will undermine economic growth in this country and therefore it is a major issue which must be addressed.”

* * *

“Clearly, California is a very important part of the American economy. It is roughly a sixth, and it’s scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Power Points Background

The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.

*

Daily Developments

* California’s crisis threatens the nation’s economic growth, Federal Reserve Chairman Alan Greenspan said.

*

* The Assembly speaker introduced legislation that would give the state stock ownership interest in private utilities and allow them to pay their debts with ratepayer money.

*

* The governor said he expects to sign long-term contracts within 10 days with power suppliers that submitted bids to sell electricity to the state.

*

Verbatim

“It’s scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states.”

-- Alan Greenspan

*

Complete package and updates at www.latimes.com/power

*

More Inside

Power of Three: DWP manager S. David Freeman, Nasdaq chief Frank Zarb and former Southern California Edison President Michael R. Peevey bring broad experience to the task of helping steer the state out of trouble, A16

Alternative Energy: Negotiators hope to finalize a deal soon with so-called cogenerators, A17

*

More Inside

Lives on the Line: Thousands in the Southland rely on machines in their homes to live. A power outage could threaten their lives. B1

Hopes Up: The outlook for California’s utilities brightened on the prospect of legislative relief, C1

Farm Woes: Spiraling natural gas prices and costly power outages hit the agricultural industry hard, C1